Cookie Creations

Part 1 and 2

(a) Natalie has a choice between a sole proprietorship and a corporation. A partnership is not an option since she is the sole owner of the business.

A proprietorship is easier to create and operate because there are no formal procedures involved in creating the proprietorship. However, if she operates the business as a proprietorship she will personally have unlimited liability for the debts of the business. Operating the business as a corporation would limit her liability to her investment in the business. Natalie will in all likelihood require the services of a lawyer to incorporate. Costs to incorporate as well as additional ongoing costs to administrate and operate the business as a corporation may be costly.

(b) Yes, Natalie will need accounting information to help her operate her business. She will need information on her cash balance on a daily or weekly basis to help her determine if she can pay her bills. She will need to know the cost of her services so she can establish her prices. She will need to know revenue and expenses so she can report her net income for personal income tax purposes, on an annual basis. If she borrows money, she will need financial statements so lenders can assess the liquidity, solvency, and profitability of the business. Natalie would also find financial statements useful to better understand her business and identify any financial issues as early as possible. Monthly financial statements would be best because they are more timely, but they are also more work to prepare.

(c) Assets: Cash, Accounts Receivable, Supplies, Equipment, Prepaid
Insurance

Liabilities: Accounts Payable, Unearned Revenue, Notes Payable

Owner’s Equity: Natalie Koebel, Contributed Capital; Dividends

Revenue: Teaching Revenue

Expenses: Advertising Expense, Supplies Expense, Travel Expense, Telephone Expense, Insurance Expense

(d) Natalie should have a separate bank account. This will make it easier to prepare financial statements for her business. The business is a separate entity from Natalie and must be accounted for separately.

Cookie Creations

Part 2

(a)

General Journal

Date / Account Titles and Explanation / Debit / Credit
Nov. 8 / Cash / 500
Common Stock / 500
9 / No entry required since this is not a monetary transaction.
11 / Advertising Supplies / 95
Cash / 95
13 / Baking Supplies / 125
Cash / 125
14 / Baking Equipment / 300
Common Stock / 300
16 / Cash / 2,000
Notes Payable / 2,000
17 / Baking Equipment / 900
Cash / 900
20 / No entry—no transaction has occurred.
25 / Cash / 25
Unearned Revenue / 25

(a) (Continued)

General Journal J1

Date / Account Titles and Explanation / Debit / Credit
Nov. 29 / Cash / 100
Teaching Revenue / 100
30 / Website / 600
Accounts Payable / 600
30 / Prepaid Insurance / 1,200
Cash / 1,200

(b)

Cash

Date / Explanation / Ref. / Debit / Credit / Balance
Nov. 8 / J1 / 500 / 500
11 / J1 / 95 / 405
13 / J1 / 125 / 280
16 / J1 / 2,000 / 2,280
17 / J1 / 900 / 1,380
25 / J1 / 25 / 1,405
29 / J1 / 100 / 1,505
30 / J1 / 1,200 / 305

Advertising Supplies

Date / Explanation / Ref. / Debit / Credit / Balance
Nov. 11 / J1 / 95 / 95

Baking Supplies

Date / Explanation / Ref. / Debit / Credit / Balance
Nov. 13 / J1 / 125 / 125


(b) (Continued)

Prepaid Insurance

Date / Explanation / Ref. / Debit / Credit / Balance
Nov. 30 / J1 / 1,200 / 1,200

Baking Equipment

Date / Explanation / Ref. / Debit / Credit / Balance
Nov. 14 / J1 / 300 / 300
17 / J1 / 900 / 1,200

Website

Date / Explanation: / Ref. / Debit / Credit / Balance
Nov. 30 / J1 / 600 / 600

Accounts Payable

Date / Explanation / Ref. / Debit / Credit / Balance
Nov. 30 / J1 / 600 / 600

Unearned Revenue

Date / Explanation / Ref. / Debit / Credit / Balance
Nov. 25 / J1 / 25 / 25

Notes Payable

Date / Explanation / Ref. / Debit / Credit / Balance
Nov. 16 / J1 / 2,000 / 2,000

Common Stock

Date / Explanation / Ref. / Debit / Credit / Balance
Nov. 8 / J1 / 500 / 500
14 / J1 / 300 / 800

Teaching Revenue

Date / Explanation / Ref. / Debit / Credit / Balance
Nov. 29 / J1 / 100 / 100

(c)

Cookie Creations

Trial Balance

November 30, 2005

------

Account Debit Credit

Cash $ 305

Advertising Supplies 95

Baking Supplies 125

Prepaid Insurance 1,200

Baking Equipment 1,200

Website 600

Accounts Payable $ 600

Unearned Revenue 25

Note Payable 2,000

Common Stock 800

Teaching Revenue 100

$ 3,525 $ 3,525

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